How China’s Qihoo Resists Short-selling Attacks
王根旺 王根旺

How China’s Qihoo Resists Short-selling Attacks


  “In dealing with shorting, the most fundamental thing is to be clean, to have no problems. Second is your results.”

  Dictated from Zhou Hongyi, Founder of Qihoo 360

  Compiled by Jing Ye, The Founder magazine (

  I can really understand the issue of shorting.

  In recent years, China has had a batch of companies that have listed in the United States by purchasing shell companies. To put it bluntly, the proportion of fraudsters is pretty high, and some of the fraudulent methods have exceeded the American imagination. They bring out the A-share spirit -- profit the first year, loss the second year, ST the third year. They pump the company quite well on the road show, but when it comes to the quarterly results, they can't meet requirements.

  Coupled with the variable interest entity (VIE) structure in the Chinese Internet industry, the state should have given a clear statement but equivocated. Those familiar with China's national conditions know that the VIE matter is settled, and the state cannot take any action. But Americans believe that when you don't have a law, you will always feel unsure.

  In this context, American distrust of listed Chinese companies has gradually become mainstream. Citron, and particularly Muddy Waters, discovered early that many Chinese concept stocks were bad companies. At the time I respected these short-selling firms. Short selling is a mechanism that can indeed effectively discover some bad companies. Ferreting out these companies was equivalent to removing bad eggs.

  In all fairness, very few Chinese Internet companies engage in fraud. Why? These companies all grew up taking venture capital money. When VC companies invest in you, they investigate you thoroughly. It's too hard to cheat in this industry, especially for 360, which is a company with many enemies. If you don't have problems, someone will make them for you.

  So, when Citron first shorted Qihoo 360, I was really surprised.

  After looking at Citron's accusations, I relaxed. A lot of the problems we thought to be childish, and they understood nothing of our model. So we would explain it. This was an opportunity to promote ourselves and communicate with the capital markets. We set our tone internally.

  In China, one’s attitude toward this sort of issue is very important. Whoever speaks louder seems more rational. America is different. If you react to radically, the more aggrieved, the angrier you seem, the more investors will distrust you. You must respond rationally, provide evidence, and tell the whole truth.

  I once inquired with Spreadtrum. Spreadtrum was attacked by short-sellers once. At the time, they responded quickly, quickly issued a report, maintained transparency, maintained openness. This inspired us greatly.

  In dealing with shorting, the most fundamental thing is to be clean, to have no problems. Second is your results.

  We were one of the few Chinese concept stocks whose price was higher than our listing price. Citron was haphazardly looking for targets. Maybe someone handed them some damaging materials that fit in readily. Citron's first report listed our stock exchange in America as Nasdaq. We're listed on the New York Stock Exchange (NYSE). Only a Chinese person would make this mistake. In this process, there was a site called Looking at this, one would think it is a Deloitte website, but it is actually unrelated to the auditing firm. This is a typical Chinese method of falsification. So I figured it was one of our competitors using Citron to get at us.

  The time Citron really affected us was when they distributed a post on the Forbes Chinese-language blog as "Forbes Chinese Edition Exposes Qihoo." I can't say that the author of the blog had no relationship with Citron. Reading that article, I was of course angry. But how could I respond? I first contacted Forbes China and confirmed this wasn't a Forbes action. Then, I wrote a letter of complaint to the head of Forbes English and at the same time contacted the author of the blog by email. He was a foreigner, and I politely invited him to come to Beijing for a face-to-face interview. He came to Beijing, and I spoke to him for two hours, giving explanations for all of his doubts. We also invited the head of Citron to visit, but he never came.

  The most recent time, Citron took a short position on Qihoo 360 while taking a long position on Sohu, causing (former Google China President) Kai-fu Lee to challenge Citron. This was different than Muddy Waters. Muddy Waters is adhering to its short strategy. I think if you stay on the road to greed, no one can say anything. You make money and then make more money. We respect your short selling behavior. With Citron now suddenly turning into a stock promoter, the fig leaf of the past has been torn off.

  Citron issued a total of six reports on us, and we held steady. In fact, as long as you don't buy and sell stocks, stock prices aren't important to you. Has being shorted had a substantive negative impact on us? It has. Repeated false reports will lead one astray. If someone is always talking about you, an online search returns only negative results. At the same time, allowing Citron to continue misleading will completely ruin the reputations of Chinese companies, and venture capitalists will no longer invest in them. How will entrepreneurs be entrepreneurial?

  To date, only Silvercorp Mining among Chinese companies has used the weapon of the law, expending a lot of energy and material resources. I don't think it will resolve anything. If you think that a company has no problem, even if you are falsely accused and have dirty water poured on you, stock prices always have short-term ups and downs. You patiently explain and communicate and then concentrate on doing your business well. An increase in your stock price is the maximum punishment for them.

  In this latest round, a lot of people shorted us on Citron's advice. In the end, our stock price went from US$ 14 back to more than US$ 20, punishing all the short-sellers. This is the best result.